Pacific Perspective


Friday, October 5, 2001

Hawaii leaders shouldn’t hold
breath awaiting Japan recovery

As Hawaii attempts to cope with the economic fallout of the Sept. 11 tragedy, it's natural to pay attention to both the eastbound and westbound tourist markets.

The governor's upcoming trip to reassure the Japanese makes eminent sense. But we should not expect too much help from Japan as we attempt to restore our economic health. Their economy is just too sick, and like ours will depend on a U.S. recovery.

Going into Sept. 11, Japan already was headed into recession -- its fourth in the last 10 years. Investment was off, exports were weakening, consumption was down year on year, and government spending was stagnant.

Prime Minister Junichiro Koizumi's economic reform program called for controlling government spending further while waiting for structural reforms to be made and take effect.

This "doctrinaire" approach to economic policy is part of Koizumi's reformist appeal, but in the context of a severe global economic slowdown, most analysts expected that he would have to give way on principles and authorize more pump-priming government expenditures.

To do so, however, would risk further downgrades in Japanese government debt. Goldman Sachs puts the nonperforming loan problem at Japanese banks at a still-uncomfortable 40 percent to 45 percent of GDP.

And with the Nikkei around 10,000, the capital base of Japanese banks (which hold substantial portfolios of equities) has been completely eroded; this could require nationalization of the banks were the slump in stocks to continue.

The Bank of Japan's quarterly tankan survey, with 70 percent of the responses coming in after Sept. 11, underscores the growing pessimism in the country. The survey's "diffusion" index, which subtracts the percentage of pessimistic responses from the percentage of optimistic ones, registered a gloomy 33 last month.

I have no confidence that the Koizumi government can do much to stem the current slide. As time goes on, no doubt they'll be less doctrinaire and more pragmatic about fiscal stimulus, and I'm sure the Bank of Japan will continue its sharp increase in money supply growth.

The yen may then depreciate beyond the current 120 to the dollar to around 135-140. More yen depreciation will be tough on the rest of Asia (and on Hawaii), but it is, I think, the only safety valve available to the authorities to get economic growth moving again.

I expect Japan's economy to shrink at a 1 percent to 3 percent annual rate for the next several quarters, picking up only after the United States does, which I expect in the spring of 2002.

The implication for Hawaii is clear. We can expect some recovery impulse to come from the U.S. mainland.

But more than ever before, we're on our own, living by our own wits.

Absent signs of recovery from Japan, the case for augmenting and accelerating our construction in progress budget is growing stronger every day.

David McClain is dean and First Hawaiian Bank Professor of Leadership and
Management at the University of Hawaii College of Business Administration.

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